Depreciation in insurance refers to the loss of value of the car with time. As each part of the vehicle wears out with time, the value of your car also diminishes. But how does depreciation matter to you as a car insurance policy holder?
The 'rate of depreciation' comes into play right from the time you buy a car insurance policy. Insurers calculate the rate of depreciation (depending on the age of the vehicle) to determine the value they will give for your car. In other words, the IDV or Insureds' Declared Value that insurance companies offer you, is calculated keeping the rate of depreciation in mind. For example, the rate of depreciation deducted for a 1 year old car is 5 percent whereas for a car aged 10 years, the deducted depreciation rate is 50 per cent. The older the car, the greater the rate of depreciation and the lower the amount offered by the insurer.
Depreciation rates apply for each car part except glass or parts made of glass. For rubber, plastic parts, tyres and tubes, batteries and air bags rate of depreciation is 50 per cent. While depreciation rate for all fibre components amounts to 30 per cent.
How to protect your Sum Insured from the rate of depreciation? Many insurers offer what is known as the Depreciation Shield which is an add-on. This add-on can be availed alongside comprehensive car insurance policies by paying an additional amount of premium.
The Depreciation Shield covers the depreciation amount partly or fully on assessed damaged parts allowed for replacement during repairs in case of partial loss to the insured vehicle. This add-on is not applicable in the case you lose your car completely, what is known as 'Total Loss' in insurance. It is particularly useful if you own a luxury car whose parts are costly and not easily available.
Being acquainted with depreciation is thus useful to understand how it affects your car insurance and to avail options that offset its effects.
Source : CarDekho - What is Depreciation in Car Insurance?